RTX Corporation

Good day, ladies and gentlemen, and welcome to the RTX third quarter 2023 earnings conference call. My name is Lateef, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer, Chris Calio, President and Chief Operating Officer, Neal Mitchell, Chief Financial Officer and Jennifer Reed, Vice President of Investor Relations. This call is being webcast live on the internet and there is a presentation available for download from RTX website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net non-recurring and or significant items. often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations in any other forward-looking statements provided in this call are subject to risk and uncertainties. RTX SEC filings, including its forms, 8K, 10Q, and 10K, Provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. To ask a question, you will need to press star 11 on your telephone. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will now turn the call over to Mr. Hayes.

All right, thank you, and good morning, everyone. Before we start, I want to spend just a minute acknowledging the tragic situation playing out in Israel today. It has been devastating to see what has unfolded there over the last couple of weeks, and our thoughts and prayers are with the people impacted, including the thousands of RTX employees that call Israel home. With that said, let me turn to an update on our end markets. On the commercial aero side, air travel demand remains strong. We're seeing solid air traffic growth with global revenue passenger miles essentially back to 2019 levels and domestic air travel well above 2019 levels. We also expect strong demand for holiday and business travel for the remainder of the year, supporting continued aftermarket strength for both wide-body and narrow-body aircraft. On the defense side, the elevated threat environment is continuing to drive increased defense spending globally. Just one example, in the quarter, the United States approved moving forward with the sale of F-35 aircraft to South Korea. That's estimated to be worth about $5 billion and will support further growth with this customer for F-35 content for years to come. Additionally, the U.S. State Department approved a significant sale to Spain for the Patriot air and missile defense systems earlier this month, and that's expected to include approximately $1 billion of Raytheon content. And as Russia's invasion of Ukraine unfortunately continues, we are seeing significant demand from the U.S. and our allies for advanced air defense systems and munitions. During this past quarter, this included additional orders for NASAMs, Excalibur, which are precision-guided artillery shells, Stinger, anti-aircraft munitions, and TOW, anti-tank guided missiles. Domestically, despite what we've seen over the last few weeks in DC, we remain confident that there is bipartisan support for increased defense spending, and RTX continues to be well positioned across all three of our businesses. Shifting to Pratt & Whitney, let me give you an update on the powder metal manufacturing quality matter. Our efforts to date have been heavily focused on ensuring the safety of our engines. As you saw in the press release this morning, we have finalized the charge recorded here in the quarter, which is in line with what we had previously disclosed. So just a few thoughts on the powdered metal issue. Through the early stages of removals and inspections of the PW1100 engine, which powers the A320neo aircraft, our outlook, both financially and operationally, remains consistent with our expectations. We've also made significant progress on the safety assessments for the other Pratt & Whitney-powered fleets. That includes the PW1500, which powers the A220, the PW1900, which powers the Embraer E2, and the V2500, which powers the Legacy A320. With the analyses substantially complete, we do not expect any significant incremental financial impact as a result of those fleet management plans. The focus of both Pratt Whitney and the entire RTX organization is on maintaining the trust of our customers and our partners, and we are relentlessly working to improve upon the plans we have in place today. As I've said to many of you over the last few months, we remain confident in the future of RTX because the demand for our products is robust, our end markets remain resilient across both commercial aerospace and defense, and our team is laser focused on driving performance excellence to meet our customer needs. Our backlog is now a record $190 billion, with a pipeline of both existing franchises and new technology development. As we always have, we continue to actively manage our portfolio. As you saw this morning, we reached an agreement to sell Raytheon's cyber services business in a cash sale for approximately $1.3 billion, which combined with the recently announced sale of Collins Actuation Business This will generate approximately $3 billion of gross proceeds in 2024. So with that, let's turn to slide two. As we also announced this morning, our board has approved a $10 billion accelerated share repurchase program, or ASR, which we will be initiating tomorrow. Simply put, we see a significant discount between the intrinsic value of RTX and our current stock price. The long-term outlook of the GTF remains strong and Pratt's franchises extend well beyond the GTF. The V2500 has about 6,000 engines still flying and is in the sweet spot of its aftermarket cycle. Pratt Canada continues to be the world's premier small engine manufacturer with an installed base of more than 60,000 engines. And the military business of Pratt is the sole provider of engines on fifth generation fighters. Collins has a great portfolio, with 70% of their product lines serving as number one or two in their segments, and strong margin expansion opportunities. And lastly, our newly combined Raytheon segment has an incredible number of well-established franchises, along with a growing portfolio of next-generation technologies. This includes LTAMS, which is the Next Generation Patriot Defense System, and the Hypersonic Attack Cruise Missile, or HACM. Given the fundamental strength of the company and growth opportunities ahead, our board recently approved an $11 billion authority to repurchase RTX shares. This includes $10 billion through an ASR program to help capture some of that value more immediately. The new authorization replaces the company's previous program, which was approved in December of 2022. This ASR, of course, is on top of the $2.6 billion we've already repurchased year-to-date. Altogether, this will increase our capital return commitment to shareholders to $36 to $37 billion through 2025 from the time of the merger. That's up from our previous range of $33 to $35 billion. As I said, this ASR program will commence almost immediately and will be funded through a combination of short- and long-term debt. And importantly, we'll begin the process of deleveraging in 2024, in part supported by the proceeds from the recently announced dispositions that I just mentioned. So despite near-term headwinds, the future of RTX remains bright, and we remain steadfast in our commitment to deliver long-term shareholder value. With that, let me hand it over to Chris to provide additional color on the Pratt matters and to cover the Q3 highlights.

Thank you, Greg, and good morning, everyone. I'm on slide three. As Greg said, the powder metal situation is our top priority. The bottom line is that our outlook for managing both the fleet impact and the financial impact remains intact since our last call, and our team continues to execute on our fleet management and recovery plans. Let me provide a few more details, and I'll start with the GTF. With respect to the PW1100, there is no change to the plan we outlined in our September call. The fleet management plan and financial estimates remain consistent with what we said six weeks ago. And our focus is on executing all elements of the fleet management plan, in particular industrial output and material flow, MRO output, and customer support. The first tranche of the engine removals has occurred, and several of these engines were eligible for a project visit work scope. And the turnaround times for these visits average roughly 35 days. While project visits will be a smaller portion of the overall shop visits, the turnaround time is encouraging, and our teams are continuing to identify further process improvements. And from a process perspective, additional bulletins will be released in the next few weeks that outline the life limits and repetitive inspection requirements that we detailed on our prior call. And just by way of background, it is common practice for a fleet management plan to be communicated through multiple service bulletins and airworthiness directives to address different engine models, compliance times, or components and sections of the engine. Now let me share some details on our other GTF programs. For the PW 1500 and the 1900, we will institute a fleet management plan that will largely fit inside the shop visit plans that are already in place for these fleets. We believe the financial impact won't be significant and is contemplated in our current contract estimates and the financial outlook for Pratt. As part of this plan, we will place a shorter life limit on certain early configuration parts and an inspection requirement at about 5,000 cycles for current configuration parts. There will be some incremental AOGs in the first half of 2024, but we believe these will be largely mitigated by the end of the year. Regulators and air framers are aligned with this recommendation. We expect the service bulletins implementing these actions will be released beginning in November, followed by airworthiness directives. Let me now turn to the V2500. And as a reminder, we've had a fleet management and inspection plan in place since 2021. We're going to augment this plan by accelerating certain inspections, but expect this too will have very little impact operationally or financially. It will result in a total of roughly 100 or less incremental removals stretched out over the next four years, the majority of these visits having a project visit work scope. Again, very manageable given the size of the V2500 fleet, the number of spare engines available, and engines in the market with available green time. All of this is contemplated in our current contract estimates and Pratt's financial outlook. This action will be communicated through a service bulletin to be released in the November timeframe. And lastly, turning to the F-135, the Joint Program Office is reviewing our fleet management plan recommendation, which we believe will have limited, if any, operational impact on the customer. We continue to evaluate the balance of the PARAT fleet containing powdered metal and expect any fleet management plan updates, if needed, to have limited impact. With our fleet management plans largely set, Let me turn to the operational initiatives we are focused on to support our customers, increasing capacity and reducing turn times in our MRO shops, and ramping up the production of new full-life powder metal parts. First, with respect to MRO, we're accelerating previously planned investments in the GTF network to increase capacity and bring more shops online to support our customers. Just last month, Pratt announced they're adding capacity at their Singapore Engine Center, which will be Pratt's third facility expansion this year. And earlier this month, MRO shops operated by China Airlines and Korea Air inducted their first GTF engines. By the end of the year, Iberia Maintenance will also be joining the GTF aftermarket network. Once complete, this network will have 16 sites globally, having brought online six partner shops this year, but plans for an additional three shops to come online by 2025, bringing the total to 19. This will enable the network to be able to conduct more than 2,000 annual shop visits in 2025 to support the global GTF fleet, a roughly five-fold increase from 2019. We're also leveraging our extensive knowledge and talent across RTX to drive process enhancements to help us improve turn times in our MRO shops compared to our baseline plan. This includes a cross-functional team focused on part availability, repair development and industrialization, and process improvements on the shop floor. Second, and as we said in September, our objective is to replace as many HPT and HPC disks as possible with full life disks when engines come in for a shop visit in order to maximize their time on wing when they leave the shop. As we've said before, we've previously made the necessary powdered metal production and forging capacity investments and now are increasing our machining and inspection capacity. Our baseline plan today forecasts Q2 2024 to get to run rate capacity for disk production We are working to accelerate this timeline, which will allow us to replace an even larger portion of the fleet with full life parts. So to wrap up on powdered metal, our fleet management plans on the most impacted fleets are largely complete. The financial impact has been reassessed and remains consistent with what we said on our September 11th call on the subject, and we are fully focused on executing these plans. I'll shift now to the third quarter highlights, which Neil will provide some additional color on in a few minutes. On an adjusted basis, organic sales grew 12%, our third consecutive quarter of double-digit growth, and segment operating profit grew 15%. Adjusted EPS was in line with our expectations at $1.25, and we had strong free cash flow of $2.8 billion in the quarter. Sales growth was again led by the continued commercial air traffic recovery, a strong commercial OE growth of 26%, and 25% commercial aftermarket growth, while defense sales were up 2% year over year. In the quarter, we captured $22 billion in new bookings and had a book-to-bill of 1.19 across RTX, bringing our backlog to a record $190 billion. Finally, Q3 was the first quarter we officially began operating in our realigned three business unit structure. We are continuing to develop initiatives to leverage our scale and breadth to better enable customer alignment and best-in-class cost structure. Respect to our 2023 outlook, with one quarter to go, we are raising both our reported and adjusted sales outlook for the year. On a reported basis, we expect sales to be approximately $68.5 billion, and on an adjusted basis, we expect sales to be approximately $74 billion, up about 10% organically versus the prior year. We're also tightening our EPS range and have incorporated a few cents of tax headwind from some recent IRS guidance around R&D capitalization, which Neil will discuss further. As a result, we now see adjusted EPS between 498 and 502 for the year. Additionally, we expect free cash flow for the year to improve by approximately 500 million, driven primarily by the IRS guidance I just mentioned, which is favorable from a cash perspective. We are therefore increasing our free cash flow outlook to approximately 4.8 billion. So with that, let me turn it over to Neil to take you through the additional details on the quarter.